RETIREMENT INSIGHTS

Taking advantage of the SECURE Act

BlackRock |Jan 28, 2020

Income, plan design and open MEPS top agenda… along with recordkeeper questions.

Barbara Novick, BlackRock’s Vice Chairman and head of the Global Public Policy Group, called the SECURE Act “our greatest opportunity in over a decade to improve retirement security for millions of Americans.”

The question is what are the opportunities, and how can plan sponsors, advisors, and consultants take advantage? The SECURE Act is wide ranging, but for defined contribution (DC) its impact is focused on access, income, and outcomes. We’ll take a look at each area, but first, let’s summarize some key provisions:

  • Safe harbor in selecting lifetime income providers: Plan sponsors may now enjoy safe harbor protection (assuming specifications are met) when selecting lifetime income providers.
  • Income disclosure: Requires converting asset balances to lifetime income projections on benefit statements.
  • Income portability: Ensures that lifetime income products can be transferred between plans if participants change employers.
  • Raises auto-escalation cap: Automatic escalation safe harbor is now 15% instead of being capped at 10%.
  • Allows “open” MEPs: Multiple Employee Plans (MEPs) are no longer restricted to businesses that meet a commonality requirement (for example, a common owner), making it easier for small companies to band together to offer employees a retirement plan.
  • Expands access: Tax credit for new plans, simplified reporting requirements, and provisions for long-term part time workers encourage more companies to add plans or extend coverage

A cautionary note: while provisions are immediately effective, recordkeepers may not have had the time build the infrastructure to support changes in distributions, new early withdrawal exemptions, and auto-escalation caps.

Plan sponsors hoping to take advantage of the SECURE Act immediately may want to consider reviewing potential enhancements with their providers and recordkeepers to discuss timing and potential workarounds.

SECURE advantage: income


SECURE advantage: income

Perhaps the highest profile provisions in the SECURE Act are the safe harbor, disclosure, portability, and other guidelines around lifetime income. Plan sponsors and providers have been exploring ways to help retired participants manage retirement spending and longevity risk through lifetime income, and many are excited about being given the green light.

While the income provisions are great news, they introduce a range of complications. We believe that income is as much a plan design question as it is a financial and investment challenge. We believe there are two questions plan sponsors may wish to consider for taking advantage of the SECURE Act’s income provisions:

1. What kind of income would participants want?

The reason many people do not take advantage of lifetime income solutions is simple: they are complicated. There are different terms and conditions, survivor benefits, and when to purchase income, not to mention questions about how much of the portfolio to dedicate to income. Income safe harbor protection empowers a fiduciary to resolve much of the complexity for participants.

Insight, including academic research, into participant preferences may help guide plan sponsors when selecting income options. One study* compared survey responses to uncover some (perhaps unconscious) biases that may be useful to keep in mind while working with potential income providers, including:

  • Participants generally prefer annuities with medium-term period-certain guarantee, such as a 10-year period, over either longer or shorter term options.
  • Context matters: “doing the math” to show expected payouts and other additional information helps drive adoption.
  • Up to 20% of study participants reject all annuity options, but they appear to be largely independent of demographic and income levels are not a consistent predicter.

2. How will you nudge participants into a solution?

We believe that prior to the SECURE Act, income solutions have gained little traction in DC plans because of fiduciary concerns and the failure to fully integrate the solutions into plan design. While the SECURE Act has addressed fiduciary concerns, plan sponsors may want to consider the full range of plan design and behavioral financial principles to manage critical behavioral biases. For example:

  • Consider embedding an income solution into a target date fund to automatically grow a stream of lifetime income as retirement approaches.
  • Design solutions that incorporate both a lifetime income base and a traditional portfolio to overcome concerns about liquidity and upside market participation.
  • Use technology to give participants transparency into their growing income stream, and participant communications to reframe their retirement savings plan as a means of protecting their ability to spend in retirement.

We believe that incorporating lifetime income solutions into a target date strategy has the potential to “check all the boxes” by integrating income into the plan design, providing transparency, and positioning income as expected end objective of the workplace plan.

SECURE advantage: access


SECURE advantage: access

Over the past twenty years, behavioral finance has driven a revolution in plan design so that many people entering the workforce today are automatically enrolled in a diversified, age appropriate investment portfolio, at a reasonable deferral rate, with automatic escalation to build their deferral rates and investment balances as their career grows.

While not perfect, the DC system gives many new workers a reasonable leg up on retirement success. The problem is that the system leaves too many people on the outside. Current plan sponsors and many smaller companies may consider meeting with providers or advisors to explore: 

1. Open MEPs

Multiple employer plans were once limited to companies with ownership, a location, or some other factor in common. In addition, actions by one member of the MEP could negatively impact the entire plan. The SECURE Act has addressed these challenges and initiated several exciting changes. Advisors (and business owners) may wish to explore:

  • The potential for creating economies of scale by bringing several companies together into a single MEP
  • New tax credits for companies starting plans

2. Part time workers

Established plans for companies with long-term part time workers, such as retail and food service providers, as well as other industries, may be able to make a major positive benefit by making the plan available to them.

  • Work with the provider to review their current workforce and estimate the impact of extending plan benefits to new classes of workers
SECURE advantage: Outcomes


SECURE advantage: Outcomes

The long time horizon in retirement saving means that seemingly small changes can have major impacts on retirement outcomes. Raising the cap on auto escalation is an example. As the illustration below shows, raising the cap from 10% to the newly approved 15% can increase retirement savings or shorten the number of years a participant needs to work to reach his or her goal.

Our suggestion:

  • Work with your provider to explore the impact raising the cap can have on a plan’s participants.

Auto-escalation scenarios*

Auto-escalation scenarios

For illustrative purposes only.
*Based on BlackRock’s Future in Focus® tool. Please see Assumptions and Methodologies for more information about the inputs used and for the tool’s assumptions and methodology.
The projections or other information generated by the Future in Focus App (“App”) regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. Actual participant outcomes may vary with each use and over time.
** Rounded mean income of the 15-24 age group. U.S. Census Bureau, Current Population Survey, 2016 Annual Social and Economic Supplement.

To help explain what the bi-partisan SECURE Act encompasses for both retirement in general and participants in DC plans, please visit the following publication featuring Joe Craven, the recently retired head of retirement policy for BlackRock’s Global Public Policy Group, and Dagmar Nikles, head of plan strategy for BlackRock’s Retirement Group.

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